The coronavirus pandemic did a number on restaurants, especially early on, as many establishments were forced to close to customers and limit themselves to takeout and delivery only. Even once dining establishments got the green light to open again at limited capacity, many customers still opted for delivery to avoid the risks associated with in-person dining.
Many restaurants, however, couldn't handle the surge in delivery demand the pandemic produced, and so they had to turn to third-party services like DoorDash (NYSE: DASH) and GrubHub (NYSE: GRUB) as partners. But while delivery apps do a great job of helping restaurants generate revenue, their fees are a strain on food establishments, many of which already operate with pretty tight margins.
Commissions are killing restaurant revenue
Delivery apps serve a very important need for restaurants, and so it's natural that they'd want to capitalize on that. But there's a difference between making money and highway robbery, and some restaurants are convinced that delivery apps are guilty of the latter.
Delivery apps routinely charge commissions that total 20% to 30% of food orders, and that's on top of the delivery fees they pass onto customers themselves. But restaurants can't afford those enormous costs, and in some cities, lawmakers are fighting back on their behalf -- namely, by imposing limits on the commissions delivery apps can charge. DoorDash, for example, found itself capped in 73 markets by the end of 2020.
Of course, delivery apps aren't just accepting those commission limits and cutting their losses. Instead, they're finding ways around them by imposing new surcharges to compensate. And while those supplemental fees are largely being absorbed by customers, not restaurants, they have the potential to hurt dining establishments nonetheless. If food delivery becomes prohibitively expensive, customers will stop ordering and restaurants will lose out on sales, which could ultimately put them at risk of closing down. If that were to happen, commercial landlords would be left to pick up the pieces -- and scramble to fill vacancies.
Losing restaurants is also bad for communities. Homes near thriving, restaurant-packed town centers could decline in value if closures ensue at a rapid clip.
Will restaurants cut back on delivery post-pandemic?
Right now, when it comes to delivery app fees, many restaurants are pretty stuck. Until the pandemic comes to an end, customers are apt to rely heavily on food delivery, and restaurants can't afford to lose out on that revenue.
But once the pandemic wraps up, restaurants could shift their focus to indoor dining and seek to cut back on delivery. This strategy works especially well for restaurants with liquor licenses, as markups on alcohol can be tremendous.
Ultimately, when it comes to delivery apps, many restaurants don't want to use them, but are, at least for now, backed against a wall. Once dining establishments are able to reopen at full capacity, cutting back on delivery may end up being a profitable route to take. But for now, there's still a pandemic raging, and so for the foreseeable future, restaurants will probably have to kowtow to delivery apps -- and pay the ridiculous fees they're able to impose.